Thursday, December 29, 2011
8:21:45 PM EDT

More Market Noise

by
Jim Brown

Today's rally began with a short squeeze and the velocity faded as the day progressed. Reporters blamed economics and Europe but in the end it was just noise in a thin market.

Market Statistics

Reporters credited the rally on relief that Italy was able to sell more debt without yields surging to higher levels. They also credited U.S. economics with the opening spike. Both of those reasons were probably valid to some extent in creating a minor short squeeze but in the end the rally was only noise. Volume was very low and there was no conviction. This is a holiday week and these low volume moves are to be expected.

Italy was able to sell additional debt with mediocre success. They sold 10-year bonds with a yield of 6.98% where any yield over 7% is considered unsustainable. Italy has to rollover nearly 500 billion euros in debt in 2012 and 7% interest on 10-year paper is going to be a tough pill to swallow. Investors had to have a lot of faith in Italy and the EU bailout process to buy that same 10-year paper when the potential for default or restructuring over the next decade is so strong.

They also sold three billion of three-year paper at a yield of 5.62%. The total of all maturities sold today was seven billion euros and the target was 8.5 billion so the bidding was light for obvious reasons.

Immediately after the auction Italian Prime Minister Mario Monti called for an increase in the size of the EU EFSF bailout fund. He said the fund needed "significantly greater" resources to handle future problems. Obviously he is looking ahead at the strong odds Italy will need a bailout in the months and years ahead. With 1.2 trillion in debt they are far bigger than what the EFSF could handle.

This is going to be a recurring theme in the months ahead. Europe is not going to recede from the headlines for more than a few weeks at a time because the individual countries like Italy, Spain, Greece, etc are still very much deep in debt and they are sinking deeper into a recession.

There was nothing in the Italian debt sale news worthy of a market rally other than the fact they actually sold some longer dated debt. Some analysts had expressed serious doubts they were going to be able to sell it at any yield.

On the U.S. economic front the economics were mixed with disappointments on several fronts but traders apparently focused on the strong improvement in home sales and ignored everything else.

Pending home sales for November +7.3% to 100.1 on the Home Sales Index. That was an improvement over the 93.3 in October and 84.5 in September. That is the highest headline number since the expiration of the homebuyer tax credit in April 2010. Considering November is not really a strong month for sales the nearly +18% rebound in the last two months is a dramatic increase. Sales are running at nearly +6% over the same period in 2010.

The post summer slump has been erased and consumers are apparently taking advantage of the record low interest rates. Tight credit will continue to be a drag but sales are improving. According to the Federal Reserve's Q4 loan officer opinion survey an equal number of lenders are loosening credit standards as are tightening. That means if you shop the loan you can probably find someone that will take a less than perfect credit or lower down payment.

On the flip side of the economic ledger the jobless claims rose by +15,000 to 381,000 for the week ending dec-24th. The prior week was revised up slightly by +2,000 to 366,000. Some analysts were relieved the increase was not larger. Everyone expects these numbers to increase dramatically once the holidays are over and recent layoffs begin looking for work in January. I expect the numbers to rebound over 400,000 over the next two weeks. Late December is normally weak for new claims since workers want to enjoy the holidays before starting to look for work. We will see how much investors ignore the data once we return to the higher levels.

Jobless Claims Chart

The ISM Chicago declined slightly instead of the larger decrease most analysts expected. The headline number for December declined to 62.5 from 62.6. I know it was minimal but some estimates were for a reading over 63. However, the consensus estimate was for a decline to 59.0 so this was actually a "less bad" report. Analysts were expecting the parts shortages from the Thailand floods to restrain auto manufacturing in the Chicago areas.

New orders declined to 68.0 from 70.2 but backorders rose to 57.9 from 55.1. Employment also rose to 58.6 from 56.9. This is consistent with other reports and suggests the employment for December will be better than expected. That could be a stretch since tens of thousands of seasonal workers will be terminated in December.

ISM Chicago Chart

The December Kansas Fed Manufacturing Survey posted a decline to -4 from +4 in November. That is the first time the index has dipped into negative territory since May of 2009. New orders declined to -6 and the second month in contraction territory. Backorders plunged to -14 from -9 and this is the six month in contraction territory.
Capital expenditure plans declined to 17 from 23 and employment fell to -6 from +2.

This was not a good report and it was the worst report of any of the Fed regions. However, the Texas survey also reported some weakening for December. The Richmond area is heavily influenced by food manufacturers, particularly dairy products. Higher prices for raw food stocks impacts the Richmond area more than anywhere else.

Kansas Fed Chart

The calendar for Friday is limited and there will be nobody around to care about the reports. The ISM-NY is the only one of limited interest and it will be very limited this Friday.

Economic Calendar

In stock news there was none. Actually there was a little, very little. Amazon (AMZN) was downgraded by Goldman on worries new retail data could be negative for Amazon. Over the last five years Amazon's Q4 sales growth has beaten the overall average +23%. Based on data from Comscore that would suggest +38% sales growth by Amazon this quarter or $17.87 billion. Analysts are currently expecting $18.62 billion so the Comscore numbers are predicting a revenue miss.

Amazon said it sold more than one million Kindles per week in December. In a separate comment Bezos said they sold "millions and millions" of Kindles. The Kindle in all versions were the top selling products on Amazon.com.

Did you know that two of the top selling Kindle books on Amazon were self published by authors on Amazon? That is rapidly turning into a very big market. Secondly, did you know you can "gift" eBooks? If someone on your holiday list has a Kindle you can give them an eBook as a gift. No shipping delays and no shipping cost. Retailers of all flavors should beware of Amazon. They are the stealth story of the retail sector. Despite their advertising and the analyst comments they continue to find new ways to generate income. If only they would find a way to split their stock!

Amazon shares fell -$7 on the Goldman report then rebounded to close flat for the day. Amazon shares have been declining all quarter on worries their margins would take a significant hit from the $199 Kindle Fire. They are selling the device at a loss in order to put an online shopping terminal in everyone's hands. Considering the strong rebound today is all the bad news already priced in?

Amazon Chart

The semiconductor sector rebounded nearly 1% today after a Piper Jaffray analyst said chip demand was likely to rise in Q1. They said there was a strong sell through of electronic devices in December and that would drive a replenishment cycle. Also, they expect an increase in infrastructure spending in Q1. Some of Pipers favorites include QCOM, ALTR, VLTR, XLNX and FSL.

Shares of Yahoo (YHOO) rallied again after Alibaba Group hired Washington lobbying company Duberstein Group. This suggests Alibaba may be getting ready to launch a bid for all of Yahoo instead of just buying back Yahoo's ownership stake in Alibaba. Yahoo owns 40% of Alibaba and 35% in Yahoo Japan. Japan's Softbank has a 30% stake in Alibaba and jointly owns Yahoo Japan. These intertwined assets are making it difficult for anyone to make an offer for the entire company because they know there will be objections by those two Asian companies over having their stakes change hands. The Yahoo stake in Alibaba is worth between $13 to $18 billion. They paid $1 billion for the stake several years ago. Alibaba has a first right of refusal on any outright acquisition of Yahoo by anyone else.

By hiring the lobbying firm they hope to head off any political opposition to a Chinese firm buying an American Internet giant. The situation is definitely heating up but YHOO shares can't seem to break out of the downtrend resistance at $16.50. I believe investors are tiring of the constant news headlines but no real acquisition offers.

Yahoo chart

Gold prices declined again even though the dollar weakened against the euro. Gold closed at $1,546 and just above the September five month low at $1,535. This is considered a critical support level followed by stronger support at $1,485. Gold is nearing support that is considered crucial for the multiyear gold rally. This is the level where investors should be thrilled to see as the calendar turns over and a new investment year begins. Gold declined -$18 in regular trading and has rebounded +10 in after hours.

Silver hit the same support equivalent support level today and then rebounded to close positive for the day. I believe this should be a strong support level for silver and I bought some more physical silver today. Coin shops in my area were selling 90% U.S. silver coins for 20 times face value and one ounce Silver Eagles for $30 each.

Gold Chart

Silver Chart

The S&P rebounded back over the 200-day average at 1258 but just barely. Old resistance at 1265 came back to haunt us and the index came to an abrupt halt. With extremely light volume expected on Friday I would seriously doubt if we will see that resistance broken. The most likely result will be a flat market as the market makers and fund managers try to close the S&P over 1257 so the S&P will close positive for the year. It may be a fight without a positive headline from Europe to get the ball rolling early.

Quite a few analysts are looking for a dip in January. I am in that group. It may not be the first couple days because of the retirement funds hitting the market but I think we will see a dip sooner rather than later. Of course that is just my opinion. If we see the S&P close below the 200-day again on Friday it would be a bad omen. Current support (light) would be yesterday's low at 1250.

S&P Chart

The Dow chart is similar to the S&P with dead stop resistance at 12,285. That level has held the Dow in check for the last four days. Note on the chart how flat the 200-day line has been. The only real trend for the Dow is sideways. Like the S&P a decline below Thursday's low around 12,150 would be traumatic and suggest January will get off to a bad start. Conversely a rally over 12,300 could trigger buy stops and possibly carry over into next week.

Dow Chart

Google and Apple posted modest gains and that helped push the Nasdaq higher. Biotechs and semiconductors were the major contributors as each sector posted decent gains. ISRG added +8.

The Nasdaq edged back over the critical 2600 level to close at 2613 but I suspect we will see numbers starting with 25 again soon. Initial support for the Nasdaq is 2550. Unfortunately the Nasdaq has downtrend resistance at 2630 and serious resistance at 2650-2660. It could be a tough road higher for the tech sector. The Piper Jaffray note on chip stocks today did help but will it last?

Nasdaq Chart

I would be careful entering positions on Friday. The very low volume ahead of the three day weekend could mask underlying trends when coupled with fund managers trying to close the S&P in positive territory for the year. I do expect a decent dip in early January so I am looking to buy puts on any bounce that does not breakout to new relative highs.

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